Turkiye Is Bankasi AS
IST:ISCTR.E
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Turkiye Is Bankasi AS
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Ladies and gentlemen, welcome to Isbank Third Quarter 2018 Financial Results Conference Call and Webcast. The event is being hosted by Mr. Senar Akkus, CFO; Ms. Gamze Yalçin, Deputy Chief Executive; Mr. Suleyman Ozcan, Head of Investor Relations. Madame, sir, please go ahead.
Thank you. Good evening to all, and welcome to our conference call. This is Senar Akkus speaking. I have with me Gamze and Suleyman from our Investor Relations function. Gamze will go into the details of our performance, but before that, I would like to give a very brief outlook for the economy and period highlights for Isbank.
Heightened trade and geopolitical tensions, together with the continued [ political ] normalization in the advanced economies helped put pressure on the exchange rate and funding cost of emerging markets especially in the second half of the year and have led to reductions in capital inflows. In fact, emerging markets faced a very volatile economic and financial environment.
As you know, financial volatility was significantly higher in Turkey compared to other emerging markets. Country-specific factors played an important role in this development, especially in August, taking place in domestic markets but more intense than expected in any worst case scenario.
In addition to the high volatility in financial markets, leading macroeconomic indicators pointed to offset the slowdown in the economic activity has gained momentum. Manufacturing PMI remains below the 50 threshold level in the last 7 months concerning the deepening of the slowdown in the manufacturing sectors.
Due to the weakness in Turkish lira as well as higher food and oil prices, annual CPI inflation has remained in the double-digit range, making this price stability the focal point of the domestic markets.
Restoring price stability was determined as the main objective of the economic policies in the new economy program. Moreover, Central Bank took a step beyond expectations on its meeting in September by increasing the policy rate to 24%. Central Bank's higher-than-expected interest rate hike, new economic programs satisfying the market expectations in general, and the influence in the international relations has supported domestic financial markets since the second half of September.
After this brief outlook, let's move on to Page 3 where we have the main highlights for the period. In the third quarter, we sustained our growth performance in core revenue items. Swap adjusted net interest income posted a 8.8% quarterly growth, contribution of fee income continued, and year-on-year fee income growth reached 27.5% and 3.92% swap-adjusted NIM for the first 9 months is above our full year guidance. Turkish lira loan deposit spread was maintained above 6%. Demand deposit hitting a share of 27% in the total deposits continued to support the net interest margin. Despite the negative turn in asset quality, NPL ratio continued to be the lowest compared to peers on a sales-adjusted basis at average of private sector banks.
FX liquidity remains strong and average FX LCR for third quarter was 230% despite the repayment of syndicated loan and Eurobond redemption. Capital adequacy ratios stood at a comfortable level of 14.4% without the impact of temporary forbearance measures.
Now I will leave the floor to Gamze for the details of the bank's performance.
Thank you, Senar. Welcome all. Page 4 shows the major P&L items as well as profitability and efficiency indicators. In the first 9 months of the year, we posted a strong year-on-year total operating income growth of 27.2%, mostly driven by significant increases in core revenue items. In the third quarter, swap-adjusted net interest income posted a decent increase of 8.8%, while the year-on-year growth in the first 9 months compared to the same period of the year was 24.3%.
Year-on-year, fee income growth was strong at 27.5%, being well above our guidance. Contributions from subsidiaries increased to TRY 902 million in Q3 from TRY 669 million in Q2, being another item which supported the strong revenue performance. Year-on-year OpEx growth remains below the CPI inflation figure and cost to income ratio went down to 35.1%.
TRY 150 million of pre-provisions that were set aside in Q2 has been released this quarter, and our total pre-provisions stood at TRY 1.65 billion by the end of Q3. At the end of first 9 months, higher provisioning needs, driven by the adverse fees in the operating environment, which resulted in a macroeconomic adjustment in our model, led to a decline in the profitability ratio.
On Page 5, we have the main balance sheet items. In line with the general trend, Turkish lira loan portfolio remained almost flat compared to the previous quarter whereas decline in the FX loans continued in USD terms.
Looking at the liability side, Turkish lira deposits slightly increased by 2.6%, while FX deposits contracted by 10.4% on USD basis compared to the second quarter. Demand deposits continued to support our low-cost funding base. Share of demand deposit in total deposits stood at around 27%, which is the highest ratio among peers.
During the period, we continued to maintain a strong liquidity profile with the average asset liquidity coverage ratio at 230.8%. Even with the effect of syndicated loan repayment, on the 27th of September and eurobond redemption on the 10th of October, our FX LCR remains strong compared to our peers by the end of September.
In order to give you a general insight on our FX external borrowing profile, we have provided the maturity breakdown of our FX wholesale funding. We closed our new syndicated loan facility by the end of October and including this, we have USD 5.7 billion of FX liabilities maturing til the end of 2019. Currently, we have a readily available FX liquidity around $9 billion, which includes USD 5.5 billion (sic) [ USD 5.7 billion ] of FX swaps and USD 1.5 billion to USD 2 billion of FX reserves under reserve option mechanism as well as other items can cover our liabilities until the end of 2020.
On the next page, we have the net interest margin and swap evolution. The increase in Turkish lira deposit cost was limited as a result of our cost-oriented approach and strong demand deposit base. In a period in which the market rates went up significantly, coupled with sharp CBRT rate hikes, we managed to keep our blended Turkish lira deposit cost at 11.6% in the third quarter.
Repricing on the asset has continued, which also supported the net interest margin performance. Turkish lira loan-to-deposit spread was almost flat compared to Q2 while yield on Turkish lira securities increased by almost 3 percentage points, mainly driven by the CPI linkers. Although spread on the Turkish lira side was strong, swap rates in the quarter increased significantly, and there was a 30 bps decline in swap-adjusted net interest margin. In the third quarter, short-term swap funding was USD 5.2 billion and swap costs was TRY 1.2 billion versus TRY 712 million in Q2. At the end of the day, swap-adjusted NIM was still above the guidance range of 3.7% to 3.9%.
Next page provides information about the securities portfolio and CPI linker contribution. CPI linkers, which make up 47% of Turkish lira securities portfolio, made a strong revenue contribution to high inflation reading and increasing inflation expectations in the quarter. Interest income from CPI linkers was around TRY 1 billion in the third quarter. Quarterly yield increased by 4.5 percentage points and reached 18.05%.
As you know, unlike our peers, we have been using Central Bank expectation surveys for the valuation of CPI linker portfolio. Please note that if they use the end of September annual inflation figure, which was 24.5%, quarterly interest income figure would be TRY 466 million higher, which corresponds to 18 bps increase in 9 months swap-adjusted NIM and 1.4 percentage points higher RoATE, return on average tangible equities.
On the next page, we have the fee income performance. We continue to deliver strong growth momentum in terms of fee generation. In the third quarter, year-on-year fee income growth was a remarkable 27.5%, which is well above our full year expectation. On a year-on-year basis, all items supported the growth performance, noncash loans and payment systems being the largest contributors.
We have the FX quality indicator on the next page. Going on to the trends in the sector, we have seen an increase in the NPL ratio. On the other hand, we continue to be below the private sector by average. Share of Stage 2 loans stood at 10.3% at the end of Q3. Please note that 91% of Stage 2 loans are not delinquent at all. Net cost of risk increased in the third quarter, reaching 223 bps for the first 9 months. The drivers of the increase in provisioning expenses was a combination of currency impact from the FX loan book, model update plus higher inflows. Around 55% of Stage 1 and Stage 2 provision expenses in the quarter resulted from the update of macro parameters on the IFRS 9 model. Looking at the full year 2018, we expect our cost of risk to remain close to the first 9-month figure, namely 200 to 250 bps while 2018 year-end NPL ratio to be around 4.5% to 5%.
Next page shows the capitalization levels. In the third quarter, our reported capital adequacy ratio increased to 17.42%. Please note that in the presentation, for various impacts are calculated on an individual basis on end of June figures. By the end of September, the ratio, excluding forbearance impact, which is 300 bps, stands at 14.4%, in line with our guidance.
Ladies and gentlemen, this concludes our presentation. Thank you for attending to the conference. And now we can take your questions.
[Operator Instructions] Our first question comes from Tolu Alamutu, Exotix Capital.
I just have a few quick questions, please. The first is would you maybe be able to comment on the potential transfer of the CHP stake in the bank and what impact it could have on the management of the bank, if any? Second question is regarding liquidity in your eurobonds. Given that you have so much excess liquidity, would you consider maybe repurchasing some of your bonds as some of your peers have done recently? And the third question is on asset quality. Can you maybe talk about your exposure to certain sectors like the natural gas sector and construction as well as real estate? And the construction and real estate exposures especially in light of the changes to what currency people can pay in, in those sectors?
Thank you very much. For the first part, I can say that the representation and ownership status of positive share has been determined in the town of Istanbul, a legal entity of Isbank within the scope of the will and the [ opposite ] field below and jurisdiction. I mean, positive shares have been transferred to CHP in accordance with Ataturk's will and the working rights assigned to those shares have been exercised by CHP in line with the will as well. Also the dividends regarding the shares have been paid to Turkish Linguistic Society and Turkish Historical Society, again as determined by the will. As of today, the majority of the shares are owned by Isbank's comprehensive pension fund, which represents the employees and retirees of the bank with a 40.1% share, while Ataturk shares constitute 28.1% in total. Of course, getting the majority of the shares, the pension fund enjoys majority in the formation of the board as well. That's notwithstanding who represents Ataturk shares in the board or by whom the representatives are nominated, lives up to the capital structure Isbank continues to carry out its business activities in compliance with the laws, regulations, commercial business principles, and its own founding mission as has always been the case throughout its history. In sum, the representation and ownership status of Ataturk shares has not an effect, a major effect on Isbank [ private bank ] business. In the past, in 1950s, in 1980s, these shares were represented by the Turkish treasury, and there was nothing which was different from the times when these shares are represented by CHP. That is all I can say about the CHP ownership or a possible transfer of these shares to the treasury. And we don't have a plan to buy back our eurobonds. We are evaluating the market conditions continuously. But for the time being, we don't have any plans to buy the eurobonds in this illiquid market. For the third question regarding asset quality, we have summarized the development in the third quarter. As you know, we experienced a shock in August in terms of financial markets. We experienced a sharp increase in dollar TL rate and Turkish lira interest rate. On some days, the Turkish lira depreciation reached to 80%, 90% levels. Of course, this is -- this development has a negative impact on the asset quality of Turkish banks. And in parallel with the sectors, there is a negative trend in our asset quality. And for the third quarter, I can say that the most of Stage 2 loans and NPLs were again mainly from commercial side and from energy and construction sectors. Maybe I can give some details about our portfolio in this sense. As you mentioned in the last conference call at the beginning of August, 2/3 of Isbank's energy portfolio is under energy generation sites, of which more than half is allocated to renewable and other projects, which are very interesting for the [ period, priced in ] USD, transferred for the first 10 years of their operations. And as for the credit rating on the investments is mostly manageable, thanks to the index participation value. In fact, end of September 2018, 20% of the energy generation loans are classified under Stage 2, of which 95% is coming from nonrenewable energy projects and distribution projects. And on the construction side, I can say that again 2/3 of the portfolio is on the construction, contracting and infrastructure side, which have profit guarantees, share of real estate development in [ all new bank works ]. And the construction sector constitutes a very important part of total GDP. I mean the contribution of construction sector to total GDP is 8%. It also constitutes 7% of total employment. It's a very important sector if you take into account it takes on more than 200 subsectors. That's why the Turkish Parliament has always been taking measures to boost construction activity since the third quarter of 2016. In this sense, if you take into account the latest measures in the agenda, this measure can have a positive impact, in fact, on the construction sector. But in the meanwhile, due to the economic growth headwinds decelerating and financial conditions were heightened, these measures can have a limited impact in the short run. We may see the effect of these measures over the medium term, but if we talk about the last quarter of the year, we can still expect growth from this real estate part to be second stage launch and NPL. If you combine all these things, due to the operating environment, we expect our NPL ratio to be between 4.5% and 5% as of year-end. And we are revising our guidance, as you know, we were standing at 3% at June end. And that will be revising our guidance for the year-end at 4.5% to 5%. And also, we can expect a slight increase in the share of stage loans, but we expect the Stage 2 loan share to be very close to 10% levels as of year-end again. I hope it is okay for you.
Yes, that's helpful.
Our next question comes from Deniz Gasimli, Goldman Sachs.
I had 3 questions. One would be on your margin trends and in your deposit costs particularly. I mean, your deposit costs on the TL side went up around 2.5% during the quarter. This is, I mean, better than below the increase in the weighted average cost of CBRT funding, which is around 4.5 percentage points. So my question was, do you expect kind of the increasing deposit costs to catch up with the kind of on the rising interest rates in the fourth quarter so that, I mean, now the way the cost of funding is around 24%. So do you see the kind of effective TL deposit rate going -- increasing further to around 24% or even higher level in 4Q because this quarter, your, I mean, increase in TL deposit cost was quite, quite -- I mean, not as meaningful as one would have expected, given the increasing underlying interest rate. So it is a bit more of a timing thing? And do you expect that to kind of catch up in fourth quarter? And my 2 smaller questions were one, on the -- if you could explain the tax benefits that you saw during the quarter. And yes, that would be one question. And another would be on the TRY 150 million of pre-provision reversal during the quarter. Was it for your kind of credit exposure? Or was it for the pre-provision? Or was it maybe pension fund related, the TRY 150 million of pre-provision that you used up during the quarter? And do you expect to use further pre-provisions going forward?
Let's start with the margin trends and deposit cost. In the third quarter, especially after the rate hike of the CBRT, the increase in Turkish lira deposit costs accelerated, I can say that. And Isbank deposit costs peaked in the first half of October. And for the last few weeks, we are observing a downward trend in the rate, especially for the [ market ] share deposit. This is mainly due to the weak such year-long demand. There is not an important competition between the banks since the loan demand is not strong in the market. Meanwhile, the loan rates continue to be repriced. Also our CPI linkers, which constitute almost 46% of Turkish lira securities portfolio support net interest margin. As we expected, income on CPI interest to increase by approximately [ 30% ] in the fourth quarter, assuming that we keep the same method of valuation. And in general, I can say that the fourth quarter net interest margin will be lower than the third quarter, which is 3.72% -- I mean, quarterly net interest margin. But as of year-end, we calculated we will still be in the range of 3.7%, 3.9%, which is our full year guidance for 2018. In the worst case scenario, we can be close to the lower end of this range, I mean, 3.7% for the whole year. For the tax expense, I can say that an important part of the net income in the third quarter is coming from, as you know, subsidiaries. And as you know, this is tax-exempt. And also for tax purposes, as you know, we are market to market our portfolios, and therefore, that is not a positive tax base here. All in all, the next tax expense for the third quarter was realized at the levels as you see in the presentation. A reason for pre-provision release, nothing needs to be asset quality trends. As you know, as of year-end 2017, we released TRY 640 million provision and set aside the same amount as pre-provision. This was mainly to be expectation that the IFRS 9 can bring about a volatility in provision expenses. And this year also, in the second quarter, again, we are prepared to set aside TRY 150 million pre-provision, taking into account that the model can change if market conditions grow worse. And we intend to revisit in the third quarter again due to the provisions -- due to the development in the provisions area. For the rest of the year, again, the net income performance will be mainly related with the assurances on the asset quality. And we have a TRY 1.55 billion pre-provision. We think that this is an important result for Isbank. And we can increase it, we can decrease it. It's for mainly dependent on the asset quality trend. But please note that the provision increase in the third quarter was mainly due to the model change currency effect. And in the fourth quarter, we think that we have included all the negative developments in the market in our model. Therefore, we will not see a similar provision effect coming from the model in the fourth quarter. Also, as you all know, the dollar TL rate is in a decreasing trend. It can also post a positive impact on the provision hike because it has a base effect. Therefore, we will look at the performance of Isbank in terms of net income, in terms of operating income and decide whether to release pre-provision or add to it.
Just as a quick follow-up regarding your, I mean, deposit costs. So you said that they peaked in October but they have been coming down since then. And if you could maybe give some direction on the deposit cost, maybe not for Isbank's area but for the sector. From the number that we think it's around 24%, the TL deposit cost, which is the marginal deposit cost. So do you see that digging into the back book of banks by the year-end?
24%, 25% deposit rates are for a big amounts of Turkish lira deposits, and they are the most competitive prices prevailing in the market. At Isbank, for example, if I want to extract a big amount of Turkish lira from another bank, I have to pay 24%, 25% for the tithing. But you never see that, the average cost is much lower than this. And while I'm saying that the deposit cost peaked in the first half of October, I mean, the average cost on our time deposits, the jump is mainly in the most competitive area. I mean, for big amounts of Turkish lira deposit in September and in the beginning of October, these rates, I mean, 24%, 25%, it was low compared to 30%, 31% in the market. That's for now these rates have come down. For a short type Turkish lira deposit, we do not see a major decrease for the time being. But if Turkish lira loan demand continues to be moderate, most probably we will see the same trends in small amounts of Turkish lira deposits. Of course, if we -- this trend continues in the market, it will be reflected in our Turkish lira loan pricing most probably in December or in the first quarter of 2019.
Our next question comes from Alan Webborn, Societe Generale.
Could you -- I noticed that your corporate lending, they grew in the third quarter in TL lending, which I thought was interesting when a number of banks seem to be trying to cut back on their portfolios. I wondered whether you could just sort of give us a view of what was going on there. You have been shrinking your FX loan book but not perhaps as aggressively as some others. And I just wonder where you feel the 2 trends on sort of TL corporate and FX corporate are going and why. And are you actively looking to reduce that FX exposure? That would be one thing. I also sort of see that your mortgage lending is sort of flattish. Do you think that reflects the market? I think some other banks are cutting back a little bit more. I mean, where do you feel the dynamics of those 3 areas are going? That would be helpful. The second question would be, do you think that the -- is it rational to think that 4.5% to 5% NPL ratio is a peak? Or do you think it is just the start of a process? And do you have in your mind, your planning yet, any view as to when you think NPL levels could possibly peak? That would be the second question. And I guess, the last question would be in terms of your fee income growth, clearly it's been a phenomenon in the market that fee income has been growing as if the economy is still growing strongly, which I think makes some of us a little skeptical as to how long that can continue. What's your view about the relationship between the change in the macroeconomic situation and the outlook for fee income growth?
Thank you very much for the questions. Yes, we have growth in commercial and corporate loans. First, I should say that the mission of Isbank is to extend loan, is to support the economy. On the structure of balance sheet, as you know, especially on the loan side, we don't have a vast share of floating rate loss. That's where the corporate loans area, especially short-term loans, is a tool to manage the interest rate risk on our structured balance sheet. That's why we continuously extend short-term corporate loans to the sector, even under stressful times. On the commercial side, corporate is the most profitable area despite the negative trend in asset quality. After doing our risk calculation, we'll still be in the market for extending SME loans taking into account the profitability. Of course, without leaving the [ haziness ] or structure of our Turkish lira loan book. Until the year-end, you may still see some growth in Turkish lira loans, including commercial and corporate loans. But in any case, this growth rate, I mean, the growth rate as of 2018 will still be much lower than our guidance for 2018 because of the reasons we are talking about. On the FX loan side, it is a function of the loan demand actually. As you know, our FX loan book is mainly driven by project finances. And also for some risk management services, of course, we are not really willing to extend big amounts of equity loans nowadays, I can say. But if that pure demand -- has the demand for an FX loan, we will, of course, evaluate this and use it. I mean, it is not really the determined strategy to reduce our FX loans. It is the natural consequence of the latest development in the market. And for the NPL, I can say that if the positive trends in the markets continues, this will certainly peak. As you know, the market condition affects both the nominator and the denominator of the ratio and as the NPL rate goes down, it increases our NPL ratio because of the base effect. Therefore, it's not easy to get it, but under current conditions, if we do not experience another shock, 5% levels or slightly higher than 5% levels can be peaked, which frankly I can say. And for the fee income growth, it is 27.5% as of September. As you know, for the last 2 years or 3 years, we are performing very well in this area. For the third quarter, I can say that the credit card size and also noncash loan size contributed to fee income growth a lot. And also there is a continuous increase in the contribution of mobile channels in the fee income. This was around 17% to 18% a few years ago but now it reaches to 22% to 23% of this fee income, I mean the income for mobile channel. Of course, the slowdown in the economy will have some impact on the fee generation capacity and also we have a high rate, high base effect. Therefore, there can be a decrease in the growth rate, especially in 2019. But we are still doing our plans to achieve a fee income growth of [ above 15% ] for 2019.
I didn't quite hear what you said in terms of the increase in the CPI revenue contribution compared to Q3. Could you just tell me what that is again?
The income from CPI linkers is increasing, of course, due to the inflation increase. As you know, our method for valuation of CPI linkers is a little bit different from our peers. We are using the CBRT monthly survey expectations for the end of next 12 months and for the end of next 24 months and make a calculation to determine the market index level. In this sense, still it will be benefited from the inflation increase in this third quarter. This was, as you see in the slide, around TRY 700 million in the second quarter and it's income on the CPI linkers. In the third quarter, we achieved TRY 1 billion. And for the fourth quarter, we calculate the income on the securities at around TRY 1.35 billion if we continued to use the same method of valuation. As we mentioned in the slide again, if we use the realized figure of CPI and [ keep that ], this inflation figure will continue in the following year, it affects our net income on CPI linkers by TRY 466 million. And if I use this method as of September, I will register TRY 466 million higher than what we realized today. And as of year-end, if I change the method to realized figure CPI inflation use, this effect is -- no. I mean, I can register 800 and -- nearly TRY 850 million additional income if I change my valuation method in accordance with the method our peers are using for the time being.
Our following question comes from [ Borat Bushkar ], BNP Paribas.
I've got 2 questions. One question, the first question is about the liquidity position. When we look at the liabilities, the FX deposits were shrinking by almost like 10%. Similarly, non-deposit funding was shrinking by another 9%. Obviously, you have paid syndication in the eurobond. And FX loans are not shrinking that much and you didn't seem to sell a lot of FX securities as well. But the FX liquidity coverage ratio seemed to have increased quarter-over-quarter. And the swap book seems to be flat quarter-over-quarter as well. Where does the additional liquidity come from? I mean, normally, we should expect in this kind of situation, I guess, some shrinkage in the liquidity. And the second question is, can you give us the capital adequacy ratio and Tier 1 ratio as well without the forbearance measures for both consolidated and solo balance sheet?
You see, I can say that we have seen a very high volatility. And if you see in the slide, our FX liabilities at the end of 2019 is USD 5.9 million. And if I look at our daily FX liquidity, it is around USD 9 million for the time being. I mean, USD 5.5 billion is only being used in swap transactions. And approximately, we have USD 1.5 billion to USD 2 billion of FX in order to fulfill our treasury reserve requirements at the Central Bank and it’s USD 4.6 billion in the form of money market transactions, FX banknotes and some unencumbered securities. Therefore, we have securities in our liquidity in order to fulfill our short-term FX liabilities. Also, as you know, we have some additional assets with regarding money market transactions. And also, we have USD 3.7 billion of foreign currencies supplied to us at Central Bank. That's why we are comfortable at FX liquidity. And since the FX loan demand for the time being is not strong, we believe that we can easily match the short-term requirement in FX. And for the capital adequacy ratios without forbearance, we will be sharing it in a few minutes' time, okay?
I think that covers your questions for the time being.
Yes, I guess, the Tier 1 ratio and the capital adequacy ratio, that's all.
We will get it in a few minutes. Sorry for that.
Our following question comes from [ Bob Commerz ], UBS.
I have 2 questions, one is on the TL spreads. The loan spreads in the third quarter, 6.2%, according to Slide 7. Where do you expect debt loan spreads to go to in the fourth quarter? My second question is regarding the subsidiaries income. Could you give an indication of the ForEx sensitivity of subsidiaries income?
In terms of [ debt share spreads ], we were at the lower level than the third quarter. I mean, it is, for the time being, lower than 5%. If the decrease in deposit costs, Turkish lira deposit costs continue, we can still be higher than 5%. But obviously, I think we will not be able to catch the 6% levels, which we are pre-rating in the third quarter of this year. And for subsidiary income, I can say that as you see, there is an increase in the subsidiaries income [ constantly ]. In the first quarter of the year, it was TRY 500 million. But in the last quarter, it is around TRY 900 million. And it is mainly -- the difference is mainly coming from our nonfinancial subsidiary. There is a natural loan position on this subsidiary when the dollar TL rate goes up, this subsidiary income also rises. And I can share the percentage share of this nonfinancial subsidiary in the subsidiaries income. For the first quarter, it was around 50%. In the last quarter, I mean, in the third quarter, the share of our nonfinancial subsidiary was around 74%. And this was mainly due to the dollar TL rate increase. Also it constitutes a hedge against dollar TL rate increases and, you know, some of our peers are hedging their provision expenses against dollar TL rate. Since we have hedged through this channel, we do not need to make an additional hedge for our provision expenses. Meanwhile, I should note that as you see from our financials as of year-end, our FX open position was around 800 and -- sorry, USD 708 million. But now we are at USD 100 million. That means we are also closing our position in the times of dollar TL rates movement upward. Is this enough for your questions, I mean, for the subsidiaries income question?
Yes, crystal clear.
Now I would like to share the bank-only unconsolidated Tier 1 and total capital adequacy ratios without the forbearances. On a bank-only basis, Tier 1 ratio is 11.5%. And on a consolidated basis, Tier 1 ratio is 10.35%. And total capital adequacy ratio on a consolidated basis is 13.4%. This is for the previous question. This is without the effect of forbearances.
[Operator Instructions] Our next question comes from [ John Demeer with Banco ].
Just one question. The bank seems to generate quite a bit of Tier 1 capital in the quarters, around TRY 4 billion, TRY 5 billion. Could you explain to us where that delta comes from versus the net income?
Obviously, coming from the net income increase over the 9-month period. Also, of course, we have the effect of the forbearances on Tier 1 capital again. As you know, we have excluded the mark-to-market losses on the Turkish lira securities portfolio. And also, as you know, we have revalued our real estate in the third quarter. The mark-to-market valuations, it was around TRY 675 million. That is also for the Tier 1 capital in the third quarter.
Okay. But while the Tier 1 difference quarter-on-quarter is around TRY 6 billion. So the forbearance measures, as far as I know, they enable you to avoid losses on the portfolio but they don't add capital as far as I know. So it's not -- it's still not clear to me how the TRY 6 billion...
For the forbearance, we have canceled all the mark-to-market losses on our Turkish lira securities portfolio as of September 2018. I mean, not only the increase in losses compared to June end. We have excluded all the mark-to-market losses, which may be due to the past Turkish lira interest rate increases. I don't know if this is clear to you.
Yes, sure. So not just...
So if forbearances were not introduced, we canceled all these mark-to-market losses under the forbearance. This is the -- yes.
So it didn't only cancel the losses in the third quarter but it reversed all the losses that were recorded year-to-date, that kind of change.
Yes.
Our following question comes from Emir Moran, Unlu & Co.
Very quick question on the HR expenses. I see that it's down 14% on a Q-over-Q basis. What's the reason for this? And what should we expect in the fourth quarter?
Actually, that's mainly due to the health expenses with the effect of the price increases in the sector. And I do not want to mention HR expenses only, but as of year-end, I can say that in terms of expenses, I mean, human resource expenses, we will be in line with our full year guidance. And also there is a decrease in some provisions for like dividend provisions. It also affected the human resource expense decrease.
Our following question comes from [ Bondina Starkova ], Barclays.
I think that I missed the part when you were talking about the FX liquidity. Can you please repeat how much is your total FX liquidity and can you give us the breakdown? And then my second question is on the lira amount of the core Tier 1 capital without the forbearance on bank-only and consolidated basis. If you can give us these numbers, that will be really very helpful.
For the FX liquidity, our total FX liquidity on a daily basis is around USD 9 million. Of this, USD 5.5 million is used in swap transactions for the time being. And approximately, we have USD 1.5 billion to USD 2 billion of FX reserves at the Central Bank in order to fulfill our Turkish lira reserve requirements. Also, we have an additional USD 1.6 billion of FX liquidity, including money market transactions and FX bank notes. And this also is around USD 9 million. And this is more than to offset the FX liabilities for these coming 12 months. And for the capital adequacy ratios without forbearances, I can share these same levels again. For Tier 1 on a bank-only basis, our ratio is 11.5%. And for Tier 1 consolidated basis, it's 10.35%. And in total consolidated basis, it is 13.4% end of September.
But my question on the last one was about the lira amount, not the ratios. Can you share these or you won't be allowed to share this information?
We can provide this to you after the presentation if it's okay for you.
We have no other question. Please go ahead. Speakers, we have no other questions. Back to you for the conclusion.
Okay. Thank you very much for your participation and contribution to our presentation. For your further questions, our IR people will always be in contact with you. Thank you very much. And see you at the year-end conference. Thank you.